It has been 57 years since Nepal started planned development. However , no development plan has been fully successful. It is primarily because development plans are formulated having no or Ltd domestic funding source. Records show that our development efforts are highly dependent on foreign aid. Very few development projects are planned and executed with domestic funds. As domestic revenue has been hardly sufficient to finance recurrent expenditures, government has only two options- either to plan development activities searching probability of funding from abroad or not to undertake development activities at all. As no government can choose the second option, making domestic economy highly dependent on foreign economy is the only way.
Moreover, deficit budget has been practiced in Nepal since long to finance development activities. Economic Survey 2011-12 shows that Nepal currently has debt outstanding of about 33% of gross domestic product – 20% being external debt. From theoretical perspective, it might not be bad to have that much loan but the pace of development in Nepal does not justify the existence of 500 billion rupees in loan. People are ultimately responsible to pay back the loan so raised. Loan now means tax in the future because loan is raised to repay it back after certain period with interest from the domestic source of revenue i.e. tax. Thus, to minimize bad effects of having loan and to move the country towards self-sustenance, tax coverage should be increased without discouraging the investors.
Foreign aid including loan should not be taken simply as the means of financing development activities as it is also the cause of promoting economic and political dependence. Therefore, government should rather than raising foreign debt, make environment for domestic and foreign investors to invest in Nepal, make high profit and pay tax. Security of investment, good infrastructure, open and transparent tax system and tax administration and strong but democratic government are building blocks of investment climate. Development of good physical infrastructure again requires proper management of resources within the country, i.e. proper mobilization of tax as a tool of generating investible fund by the government. The private sector does not show interest to invest on infrastructure development for starting business rather chooses to take away the capital using any tools.
Business people should pay the income tax on actual profit they make and deposit on government’s treasury the indirect taxes-(such as VAT) they collect from the consumer. But several cases have revealed that some of them instead of paying tax on profit are hiding business transactions producing fake VAT bill. They are thus reducing income tax liability and making money out of the tax paid by the people. Business people’s attitude shows that they lack patience which is key for success of an entrepreneur. Making profit takes time. Our business people behave as if their objective is to make money irrespective of whether there is profit or not. The case of using fake VAT bill to divert the public revenue to the account of business people is the true example of that kind of behaviour. Taking action against such kind of defaulters is a must. But,simply taking action might not be sufficient to change the behaviour of those business and individuals. The thinking pattern of society should be changed. Society should respect good tax payers and discourage tax evaders. If a tax defaulter finds that his space in the society is getting narrowed down, the culture of tax payment gets enhanced.
In Nepal, income tax is hardly in the public discourse. VAT is supposed to be the single instrument of generating government revenue. Government’s policy is also to promote VAT as primary source of tax revenue. It might be good in the short run but it should not be the single largest contributor in the long run for the nation to be developed. VAT is regressive tax as people from any economic class need to pay at the same rate on their consumption and it raises the cost of products. Custom duty is becoming the lowest contributing source as Nepal has already reduced the number and rates of custom duties and is to be further reduced to insure tariff barrier-free movement of international goods to our country as per Nepal’s commitment with global and regional bodies including WTO.
Corporate income tax rate in Nepal is only 25%. Different rebates are provided for different industries. For example; manufacturing industries need to pay only 20% of profit in the form of tax. Individuals too don’t need to pay large percentage of income tax as the highest rate is 35%. House rent tax is only 10%. But tax participation is not exciting in Nepal. More than half of total tax revenue is collected at the custom offices, i.e. on imports, meaning that we are generating revenue pushing economy to the dark side of huge trade imbalance. Recent study report of World Bank shows that almost 38% of economic activities are off the government record. If government can work to reduce the size of shadow economy, the revenue definitely might increase.
It is both important and urgent to increase share of inland revenue on the the total revenue and to sift the dependence on indirect tax to the direct tax. For this, efforts should be directed to increasing tax coverage through encouraging good tax payers and discouraging evaders. If government continues relying on foreign assistance and import taxes there always remains a risk of accident as economy is standing on the knife edge.
(The Corporate Weekly: 1-7 April 2013)
(The Corporate Weekly: 1-7 April 2013)
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